Expansion of US disclosure requirements will impact foreign investors – the future of money laundering and tax enforcement

Global Investigations Insights

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1 DEC 2016By:

The United States is turning its attention to activities by foreign investors who use US trusts, limited liability entities, and other investment structures to conceal the ownership of criminal proceeds or foreign tax evasion.

For both legitimate and illegitimate reasons, investors have historically sought to shield their identities by forming certain types of US entities. The following new measures will require such entities to disclose beneficial ownership information. This information may lead to investigations and prosecutions for money laundering, domestic and international tax evasion, and other illicit financial activities.

First, in January 2016, the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department charged with safeguarding the financial system, issued two highly publicized Geographic Targeting Orders (GTOs) to combat illicit activity in the Miami-Dade County and Manhattan real estate markets. These GTOs require certain US title insurance companies to identify beneficial owners of entities for all-cash real estate purchase in Miami when the purchase price exceeds $1 million, and in Manhattan when the purchase prices exceeds $3 million. The government announced this as a pilot program to gain insight into the use of high-end real estate investments to conceal assets. In July 2016, FinCEN extended the time period for the original GTOs, and extended the scope to include real estate transactions above certain dollar thresholds in all five boroughs of New York City; in Broward and Palm Beach counties; in Los Angeles, San Francisco, and San Diego, California; and in San Antonio, Texas.

Second, FinCEN finalized new rules, known as the customer due diligence (CDD) rules, that require covered financial institutions, which include banks, brokers, and mutual funds, to obtain information concerning the beneficial owners of accounts held by entities. Under the CDD rules, these financial institutions are required to identify natural persons who own 25 percent or more of an entity that owns a US financial account or who have "significant responsibility" to control such an entity.

Third, in May 2016, the Treasury Department proposed regulations that, if promulgated, would impose new disclosure obligations on single-member limited liability companies (LLCs) owned by foreign persons, a type of entity that historically has been largely invisible to the government for reporting requirements. Under the proposed regulations, a single-member LLC would be required to identify its beneficial owner to the Internal Revenue Service annually on IRS Form 5472. This entity would also be required to report each related party with which it had a "reportable transaction," which is defined broadly to include almost every type of business transaction.

Notably, the US government may seek to bring money laundering charges for activity in the US that furthers foreign tax evasion. In Pasquantino v. United States, 544 U.S. 349 (2005), the Supreme Court upheld convictions under the wire fraud statute for carrying out a scheme in the US to evade Canadian taxes. The same reasoning may support a money laundering charge. While prosecutions under Pasquantino have been infrequent, current trends in government investigations indicate that the government may turn to this prosecutorial tool going forward.